I will give you answer via analogy...so simple ..the term and the discussions...not so much.
Your in your supermarket. You on the soda isle the one quart bottles of COKE...their $1.27 cents each...but if you buy 5, they are .99 each....this is THE NORMAL..
now when the inversion occurs...
you go to the the same soda isle, you pick the same bottle of coke...now....each are $.99 and if you buy 5 instead of saving you money...it costs you money.
Now there is a second question that comes right up...Is this bad or good? My answer is how can it be bad. Usually you need more money to get the best price, so how can this be bad for everyone to save a buck...
NOW...
Lets analyze ...the reason this is working is cause of supply and demand being propelled with "what the market can bear. The economy is moving faster than ..."Normal"...can keep up with...it takes time for POLICY to respond to a free market...
I'm no Finance guy, but this is simple
Here’s What the ‘CRAZY INVERTED YIELD CURVE’ Means for You
President Trump is distressed about
the “CRAZY INVERTED YIELD CURVE,” and he doesn’t feel “clueless Jay
Powell” (who, in case you have forgotten, is Trump’s own appointee to
the chairmanship of the Federal Reserve) is doing enough to address it.
The stock market, which fell 800 points today, looks pretty distressed too.
The
“yield curve” refers to how interest rates on Treasury bonds change
with the maturity of those bonds. If you’re lending money for a longer
period, you can usually expect to earn a higher interest rate. When
shorter-term bonds pay higher interest than longer-term bonds, that’s an
inverted yield curve. This has often been a sign of an impending
recession because it shows that investors expect interest rates to fall
in the near future.
You
may have been surprised to see headlines today saying the yield curve
has inverted for the first time in over a decade, because you’ve
probably seen the occasional headline over the past few months about the
yield curve already being inverted. This is because it depends on which
points on the curve you’ve looked at to measure inversion. A few months
ago, the yield on ten-year Treasury bonds fell below the yield on a
three-month Treasury bill. Today, the ten-year rate fell below the two-year yield, which is the yield-curve comparison most frequently used to forecast recessions.
Research analyst Jim Bianco summed up the difference between the two measures nicely on Twitter:
“2yr/10yr measures econ strength … 3m/10yr measures Fed policy.” I will
explain this distinction and why it makes sense to focus most on the
two-year/ten-year measure.
Roughly,
the interest rate on a long-term bond should be the average interest
rate on short-term bonds that will prevail during the term of the long
bond, plus a “term premium” to compensate the lender for risks
associated with lending on fixed terms for a long period. The Federal
Reserve controls short-term interest rates; it does not control
long-term interest rates, but it does influence them by providing
guidance about its future short-term interest-rate actions and sometimes
by buying and selling bonds with longer maturities. In general,
interest rates should be expected to fall when the economic outlook is
weak, because fewer people will be interested in borrowing money.
So
when the Fed has clearly telegraphed that it is about to cut short-term
interest rates, it makes perfect sense that long-term bond yields would
fall in anticipation of those cuts. Or if the Fed appears to be in
denial about the need to cut rates sharply but is expected to figure it
out sooner or later, that’s another reason long-term yields would fall.
But the short-term bond yields themselves wouldn’t fall until changes to
interest rates are truly imminent or have already happened. So if the
president is talking about the three-month/ten-year when he’s yelling
about the yield curve and the Fed on Twitter, he’s actually onto
something, in that the Fed could get the three-month rate back below
longer rates pretty easily if it cut interest rates more aggressively.
But
the two-year yield … well, unlike the three-month yield, it should be
pricing in any anticipated rate cuts to a significant extent, since a
lot of them are likely to happen within the next two years. And assuming
the Fed’s current cycle of rate cuts is just a limited “mid-cycle
adjustment,” as Powell declared last month to Trump’s annoyance, the
ten-year yield should price in the idea that rates will go back up at some point when the economy returns to strength.
Instead,
the two-year yield is now higher than the ten-year yield. To Bianco’s
point, this is less a sign about expected Fed behavior than about
expected economic performance — investors expect the Fed to need to cut rates and then need to keep them low for a long time, which is why this is being treated as a recession indicator.
Or at least it’s being treated that way by some people.
“There
are a number of factors other than the market’s expectations about the
future path of interest rates that are pushing down long-term yields,”
former Fed chair Janet Yellen told Fox Business Network today, which is a
reason to think inversion is a “less good signal” of impending
recession than it used to be.
In
particular, low and even negative global interest rates and global
economic uncertainties are driving investors worldwide to buy U.S.
Treasury bonds, and all that buying pushes the yields down. There has
also been a reduction over time in the typical size of the term premium,
meaning the economic outlook doesn’t have to move as far from neutral
as it used to for the yield curve to invert.
Ultimately,
the yield curve is an indicator that reflects market participants’
assessments of certain fundamental conditions, including the economic
outlook. It is not a fundamental indicator itself. As Ben Hart and I discussed on Monday,
economic data and news events provide a mixed picture, with some
numbers that continue to look strong (particularly employment data)
while others indicators weaken and downside risks loom, particularly
related to China. The inverted yield curve and the barfing stock market
are two more data points showing that market participants are
increasingly focused on those negative indicators and downside risks.
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